NetApp Post-Earnings Worries Overblown, UBS Names The Stock A Buy

Last month, NetApp Inc. NTAP prompted a modest selloff with disappointing guidance. This month, with its share price on the rise, it’s regained the confidence of at least one firm and claimed the label “modern growth story.”

UBS analysts Steven Milunovich and John Roy upgraded NetApp to a Buy with a $45 price target.

“We think the post-earnings worries about services weakness will prove overdone given product sales acceleration,” they wrote in a Tuesday note. “Our long-term concern that NetApp is a declining franchise is alleviated by more competitive flash offerings and a cloud-friendly strategy.”

What’s Going Right?

Although services revenue declined last quarter, UBS expects a boost from improved product sales and renewal rates. Flash expansion, updated storage software and shipping convergence could drive double-digit growth in sales.

Meanwhile, with the emerging threat of public clouds, UBS sees an opportunity in hybrid services.

“NetApp, somewhat like Arista Networks Inc ANET, appears to have the storage jump in working with hyperscalers for native cloud storage services,” Milunovich and Roy wrote. “Revenue could rise in low single-digits over time with the operating margin breaking above 20 percent as the product margin rises toward the mid-50s.”

At the same time, the firm may continue to improve under fresh leadership.

“We underestimated the benefits of new management, including greater accountability, tighter cost controls and improved go-to-market,” they wrote.

At the time of publication, NetApp was trading at $41.97, up 3.3 percent on the day.

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Sell-Side Likes NetApp Heading Into Its Q1 Earnings Report